Forward Guidance - Carney and Draghi’s take on Independence Day!

On the Central Banks....

It was built up to be one of the most eagerly awaited Bank of England (BOE) meetings for a number of years and although the MPC decided to leave their benchmark rate at 0.50% and the level of asset purchases unchanged at £375bn we did have a break from tradition with the market receiving a statement along with the decision. This also proved to be more dovish than expected. However we will not find out until the minutes are released on 17th July whether or not the new governor voted for more QE or not.

Not to be outdone by his UK counterpart, Draghi also left the benchmark interest rate unchanged at 0.50% and the ECB deposit facility rate at 0%. Nevertheless Draghi did provide the market with essentially forward guidance (well, as much as he could...) by making the following comment “ECB rates to stay low for an extended period of time" and to "Remain accommodative as long as needed"

The key takeaway for me from the 2 meetings was that both the ECB and BOE decided to put the recent better than expected Euro-Zone and UK data to one side. This has helped the traditional risk assets (i.e. Equities) with major UK & European equities up 2-3% yesterday. However it is worth noting though that the pound had its worst day against the dollar since 2011.

The fundamental message to take away is that UK and Euro interest rates are anchored at historically low levels (0.50%) and the message appears as if this will be the case for an extended period of time.

UK Benchmark Interest Rates (Yellow) & ECB Benchmark Rates (White) Historical Performance. (Source: Bloomberg) UK Benchmark Interest Rates (Yellow) & ECB Benchmark Rates (White) Historical Performance. (Source: Bloomberg)


What does this mean for currencies…..?

Really for me any significant short-term moves in EUR/USD and GBP/USD will be more subject to new USD news than anything else. And there is probably no bigger news or indicator out of the US than the Non-Farm payrolls number and unemployment rate today at 1.30pm so keep a very close eye on the foreign exchange markets this afternoon. With most of the US out yesterday for Independence Day many market participants will probably take today off as well so there may not be the usual liquidity in the markets as there usually is for this important release.

For the release itself US employment growth has been surprisingly stable and the market looks for more stability with an expected 165k gain in non-farm payrolls and a small tick down in the unemployment rate to 7.5%.  The employment components of recent surveys have been a little soft. However, this was largely offset by this week’s +28k beat on the monthly ADP report. On balance, the whisper number is higher and this would only reinforce the talk of Fed tapering and could possible re-ignite the large scale moves seen last month so caution is advised!

EURUSD (yellow) and GBPUSD (white) Year to date performance. (Source: Bloomberg) EURUSD (yellow) and GBPUSD (white) Year to date performance. (Source: Bloomberg)



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